Due to the sharp rise in Yeojeonchae interest rates... Card loan rates 'soar' while borrowing 'plummets'

October Card Loan Interest Rates 13.20~15.16%... Around 1%p Increase Compared to Previous Month

[Asia Economy Reporter Yoo Je-hoon] The long-term card loan (card loan) business, which has emerged as a major source of revenue for credit card companies, is faltering. Although interest rates have surged due to the base rate hike and bond market tightening, loan demand is rapidly declining due to the weak asset market.

According to the Credit Finance Association on the 21st, as of the end of October, the long-term card loan interest rates of seven specialized card companies (Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, Hana) were between 13.20% and 15.16%. This represents an increase of 1.18 percentage points (p) at the lower end and 0.74 p at the upper end compared to the end of the previous month.

This year, despite the base rate hikes, the average card loan interest rates of specialized card companies showed a declining trend in the first half: 13.66% in January, 13.54% in February, 13.26% in March, 12.98% in April, 12.97% in May, 12.92% in June, and 12.87% in July. This was because loan demand decreased from the beginning of the year, prompting each card company to lower loan rates through adjusted interest rates.

However, in the second half, card loan interest rates have been on the rise. The average card loan rate rebounded to 13.22% in August and rose to 13.92% as of the end of October, surpassing the level at the beginning of the year. A card company official said, "Until the first half, we were based on funds raised during last year's low-interest phase, but now with refinancing rates soaring, it has become difficult to maintain low interest rates."

According to the Korea Financial Investment Association's Bond Information Center, as of the 18th, the 3-year credit finance bond AA+ rating (Shinhan, Samsung, KB Kookmin Card) interest rate was 5.868%, a sharp rise of more than 3.4 p compared to the beginning of the year (2.420%). Due to bond market tightening, the interest rates on card bonds issued this month are also soaring. Top-tier card companies with an AA+ credit rating have issued three card bonds (one 1-year and one 3-year) up to the 18th of this month, with coupon rates ranging from 6.208% to 6.544%.

While card loan interest rates are rising, the loan volume is rapidly decreasing. As of the end of October, the total card loan amount handled by the seven specialized card companies was KRW 37.352 trillion, down about 21.5% (approximately KRW 10.2 trillion) from the end of last year (KRW 47.5981 trillion). This is due to the application of the Debt Service Ratio (DSR) regulation to card loans since the beginning of this year, as well as the interest rate hikes and the resulting weak asset market, which have reduced overall loan demand.

The industry is concerned about profitability deterioration as the U.S. Federal Reserve's (Fed) rate hike trend is likely to continue until the first half of next year. This is because, in addition to rising funding costs, the card loan business, a source of revenue, is also faltering. According to a report released by Korea Credit Rating in October, if the base rate rises by an additional 1 p by the first quarter of next year, the increase in interest expenses for card companies is expected to be around KRW 810 billion. This approaches 29.7% of the average profit and loss of the card industry over the past three years. Consequently, the pre-tax profit of the card industry is estimated to decrease from KRW 2.59 trillion this year to KRW 1.9 trillion next year.

An industry official said, "In addition to the base rate hike, the bond and long-term commercial paper (CP) rates have also risen due to the Legoland incident and other factors, making it difficult to maintain margins," adding, "In the past, we would have responded by raising the maximum interest rate, but now loan demand has decreased, and the legal maximum interest rate regulation (20%) sets the upper limit, so it is indeed more challenging to respond."